Health Care REITs Appear to Benefit from Legislative Inaction

While WealthManagement.com refers to health care–related real estate investment trusts (REITs) as one of the most attractive asset classes for those “seeking consistent income in a yield-starved environment,” uncertainty in the health care REIT space has spiked due to the political debate over the Affordable Care Act (ACA).

Health care REITs gained 3.5 percent in the week after House Republicans pulled their health care reform bill. According to investment research platform Seeking Alpha, the “status quo in healthcare policy is generally seen as positive, particularly for skilled nursing REITs, which trade at steep discounts related to reimbursement policy uncertainty.” NAREIT reported that for 2017 so far, health care REITs have posted a high 7.14 percent total return. The top-performing health care REITs were Ventas Inc., Welltower, Omega Healthcare, Healthcare Realty Trust, and HCP, which were all up nearly 2 percent or more.

Health care is one of the largest REIT sectors, with 20 constituents and three distinct subsectors: senior housing, medical office buildings, and skilled nursing facilities. According to a post on Seeking Alpha, medical office buildings are generally the most stable because they are not significantly affected by change in health care laws. On the other hand, skilled nursing REITs and senior housing assume higher operating risk.

The health care sector delivered the highest fourth-quarter earnings among major property-type REIT sectors, yet 2017 guidance was disappointing as executives “noted significant headwinds and uncertainty related to the repeal/replace of the ACA,” according to Seeking Alpha. There was particular concern about the senior housing and skilled nursing subsectors, which face heightened reimbursement challenges and regulatory scrutiny. Now, policies remaining in place offer stability to these health care REITs, and last week’s performance suggests that it offered solace to investors as well.

Health care REITs have a noteworthy similarity to net lease REITs in that they are both bond-like and are strongly influenced by interest rate movements because of their long lease terms and low growth prospects. Looking ahead, many investors are cautiously optimistic about this sector—optimistic after eased uncertainty following the collapse of the GOP health care reform, but cautious due to the sector’s high sensitivity to interest rate changes.

* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.

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